GAIN Report - RO5004 Page 17 of 18

Voluntary Report - public distribution

Date: 4/15/2005

GAIN Report Number: RO5004

RO5004

Romania

Retail Food Sector

Annual

2005

Approved by:

Brian Goggin

U.S. Embassy Romania

Prepared by:

Monica Dobrescu

Report Highlights:

Romania has one of the fastest growing economies in Europe; GDP expanded by 8.3 percent in 2004. The retail sector, currently valued at $11.6 bill, has developed very rapidly, but it is still in its infancy, as traditional trade represents over 75% of total trade. Sales growth remains on a strong positive trend and the sector has attracted significant investment from multinational chains. The retail trade is expected to grow by an average annual rate of 7.4% over 2004-2007. Agri-food imports continue to expand, with an increasing market share for United States especially for read meat, frozen fish & seafood, and distilled spirits.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Sofia [BU1]

[RO]


Table of Contents

I. MARKET SUMMARY 3

General Information 3

Chart 1. Gross domestic product growth (%), 1999-2004 3

Table 1. Romanian Agricultural and Food Trade, $ million, nominal prices 3

Retail Trade 4

Table 2. Total retail trade value, 1999-2002, $ million 4

Table 3. Total number of retail enterprises, 1999-2002 4

Chart 2. Number of retail enterprises, 1999-2002 5

Table 4. Retail market structure, Romania, 2003-2004 5

Chart 3. Retail market structure, Romania, 2003-2004 5

Table 5. Retail market structure Bucharest, 2001-2004 6

Chart 4. Retail market structure, Bucharest, 2001-2004 6

II. ROAD MAP FOR MARKET ENTRY 8

Diagram. How goods flow 8

III. MARKET STRUCTURE 9

A. HYPERMARKETS, SUPERMARKETS, CASH&CARRIES AND DISCOUNT SHOPS 9

Hypermarkets 10

Supermarkets 10

Cash&Carries 11

Discounters 11

B. CONVENIENCE STORES, KIOSKS 12

C. TRADITIONAL MARKETS 13

IV. COMPETITION 13

V. BEST PRODUCT PROSPECTS 15

VI. POST CONTACT AND FURTHER INFORMATION 18

I. MARKET SUMMARY

General Information

Romania is the second largest market in east-central Europe after Poland, with a population of 21.7 million emerging consumers. Romania has one of the fastest growing economies in Europe: GDP expanded by an estimated 8.3 percent in 2004 – from 4.9% in 2003 – and a similar trend is forecasted for the following period. The boost in agriculture (22%) and in total consumption (10%) were the main factors contributing to this high growth in 2004.

Chart 1. Gross domestic product growth (%), 1999-2004

Source: National Institute for Statistics

Although alleviated by foreign remittances from Romanian workers temporarily working abroad, valued at roughly $2.5 billion, the current account defficit for 2004 is estimated to have reached $5.5 billion, or 7.7 percent of GDP, due to the deepening trade deficit. Despite a very good agricultural year, with record production for all crops and a recovering livestock sector, the trade deficit in agricultural and food products continued to surge, reaching a new peak at $1.3 billion, up 17 percent from 2003 (Table 1), with the value of exports covering just 28 percent of the total import value. Total agri-food exports from United States to Romania in 2004 more than doubled, from last year’s level of $93 million to $197 million.

Table 1. Romanian Agricultural and Food Trade, $ million, nominal prices

1998 / 1999 / 2000 / 2001 / 2002 / 2003 / 2004
Agri-food exports (FOB) / 436 / 483 / 338 / 433 / 434 / 568 / 730
Agri-food imports (CIF) / 1,012 / 795 / 932 / 1,206 / 1,174 / 1,738 / 2,042
Balance / -577 / -312 / -594 / -773 / -740 / -1,170 / -1,312
Exports as a percentage of imports / 43 / 61 / 36 / 36 / 37 / 33 / 28

Source: Romanian Customs

Investors are encouraged by the approaching EU integration as Romania is scheduled to become a member of the European Union in January 2007. The Romanian Agency for Foreign Investment forecasts for 2005 a total volume of foreign investment between $3 billion and $3.9 billion, after the $5 billion recorded last year, primarily due to major privatizations.

The retail sector remained one of the most attractive sectors for investors. The sector, currently valued at $11.6 bill, has developed very rapidly, but traditional trade still represents over 75% of total trade.

Retail Trade

The retail sector recorded a tremendous increase during the last 4 years. Official statistics on sales revenues and number of retail outlets are available until 2002 (tables 2 and 3). In 2002, total retail sales were valued at $ 10.9 billion, while currently the total market retail value is estimated at $11.6 billion (2004) and is expected to reach $14.4 billion in 2007. The sector remains on a strong positive trend and has attracted investment from multinational chains. During the period 2001-2004, the retail sector grew at an average rate of 5.8% per year, for the coming three years, an average annual growth rate of 7.4% is expected.

Table 2. Total retail trade value, 1999-2002, $ million

Retail Sales / 1999 / 2000 / 2001 / 2002
Food retail sales / 4,430 / 4,392 / 4,477 / 4,847
Non-food retail sales / 6,013 / 5,453 / 5,408 / 6,125
Total retail sales / 10,443 / 9,845 / 9,885 / 10,972
Food retail sales
(% in total sales) / 42.5 / 44.6 / 45.3 / 44.2

Source: National Institute for Statistics, FAS

Total number of retail enterprises is significantly shrinking over time, while retail sales are increasing, which is a clear tendency for consolidation.

Table 3. Total number of retail enterprises, 1999-2002

Type of enterprises / 1999 / 2000 / 2001 / 2002
Food retail enterprises / 75,465 / 68,709 / 65,077 / 63,345
Non-food retail enterprises / 65,358 / 60,389 / 55,285 / 46,451
TOTAL / 140,823 / 129,098 / 120,362 / 109,796

Source: National Institute for Statistics, FAS

Chart 2. Number of retail enterprises, 1999-2002

Sales in modern retail centers were valued at $400 million in 2000, $650 million in 2001, and they reached $2.4 billion in 2004. According to the data illustrated below, in 2004, 21% of retail belongs to the modern retail sector, compared to 10% in 2001 and 15% in 2003. This is a very low percentage compared to 47% in Poland and 70% in Czech Republic. Nevertheless, analysts forecast modern retail in Romania is expected to capture 44% of total retail sales in 2007.

Table 4. Retail market structure, Romania, 2003-2004

Retail format / 2003 / 2004
Romania, of which / 100% / 100%
- supermarkets / 11% / 12%
- cash&carries / 6% / 6%
- hypermarkets / 1% / 2%
- discounts / 1% / 1%
- small stores / 52% / 50%
- open-markets / 8% / 8%
- other formats / 21% / 21%

Source: GfK Romania, FAS

Chart 3. Retail market structure, Romania, 2003-2004

In Bucharest, the situation is different than at the national level, as the retail sector is more advanced with consumers earning higher incomes. As it can be seen in the table below, modern retail formats have a larger share in total retail (supermarkets 18%, hypermarkets 12%).

Table 5. Retail market structure Bucharest, 2001-2004

Retail / 2001 / 2002 / 2003 / 2004
Total retail, Bucharest, of which
- supermarkets
- hypermarkets
- discounts
- cash&carries / 100% / 100% / 100% / 100%
14% / 17% / 19% / 18%
0% / 3% / 5% / 12%
0% / 2% / 3% / 1%
5% / 5% / 6% / 5%
- small stores and kiosks / 47% / 41% / 37% / 33%
- open-markets / 13% / 13% / 10% / 10%
- food stores / 7% / 7% / 6% / 6%
- other formats / 14% / 12% / 14% / 15%

Source: GfK Romania, FAS

Chart 4. Retail market structure, Bucharest, 2001-2004

The rapid expansion of total retail sales is based on the following factors:

q  continuous increase in number of outlets and consumers’ tendency towards modern retail stores

q  growing consumer purchasing power

q  market demand growth for fast moving consumer goods

q  increasing access to credit for durable goods such as refrigerators, TV sets, cars, which released part of the budget to be spent on food items.

During the following years, new international retail chains are expected to enter the market, especially on hard discount and hypermarket segments. This will determine price suppression for the other market players as well. Cash&Carry segment is expected to keep its current place, their target costumers being small stores rather than final consumers.

Mini-markets and supermarkets which carry small range of products, but have a relatively high convenience advantage, will maintain their portion of the retail sales, as compared to kiosks and open-markets, whose dominance will diminish over time.

Consumer behavior has changed over time. While women remain the main shoppers, men are also getting more involved in shopping activity. Modern trade formats are visited only by one third of population; the frequency of visiting modern trade stores varies from once every two weeks for hypermarkets and cash & carries up to two visits a week for supermarkets.

An increasing number of consumers prefer to buy final goods rather than buy the raw ingredients to prepare the food themselves. This trend will be more visible in the future and it creates opportunities for ready-to-eat/ready-to-cook prepared foods.

According to recent market research prepared by Mercury Research Company, the main factors in influencing the buying decision are the price of goods (with a share decreasing from 36% in 2000 to 19% in 2004), special offers (slightly increased from 6% in 2000 to 7% in 2004) and distance to stores (increased from 3% in 2000 to 7% in 2004). This is certainly a sign of increased consumer awareness on product quality and product image.

Development of the retail sector triggered development of private labels for various categories of products. According to market sources, the proportion of private label products increased from 0.5% in 2003 to 2% in 2004. The concept of Private label is most common in Hypermarkets (Marca 1 in Carrefour), Cash &Carries (METRO with Aro and METRO Quality), and Supermarkets (BILLA with CLEVER). As the new segment of Discount will have an expansion this year, Private label products are expected to be the major part of the sales in these stores.

Advantages and Challenges facing U.S. Products in Romania
Advantages / Disadvantages
Romania is the second largest market in east-central Europe, with a population of 21.7 million emerging consumers / Although steadily increasing, the consumer purchasing power is relatively low
The growing retail industry is looking to diversify the range of food products / Long distances between the United States and Romania makes U.S. products more expensive than from the neighboring countries due to the freight cost
Consumers trust the food safety control system in the United Sates / Imports cost much more than local products because of corruption, tariffs and inefficient distribution systems
Weak U.S. dollar makes U.S. products more competitive / Approaching EU integration will give more preference for food products originating from EU member states than other countries
Retailers become more aggressive and new logistics companies appear which might create better conditions for US products / As the EU legislation is transposed into the Romanian legislation, access for some U.S. products will be denied

Among the issues specifically challenging the retail sector this year, land price and the currency denomination are important factors to consider. Higher land prices and availability of large plots for building construction became issues especially for Bucharest. Over the last two years land prices in Bucharest have tripled. That is one of the reasons contributing to retailers’ expansion to smaller cities throughout the country.

II. ROAD MAP FOR MARKET ENTRY

Retailers source their food and beverage products from local suppliers, either domestic producers or importers. Only a few supermarkets have their own import department, dealing with a limited range of products. The entry strategy varies according with the category of products and the facilities necessary to have in order to operate.

Diagram – How goods flow

One option for entering the market would be to work directly with importers or distributors, which are direct suppliers for these retailers and are familiar with existing legislation, trading practices and costumers. Those importers/distributors should be operating large or consolidated volumes and distribution channels with national coverage.

Small stores purchase food mostly from wholesalers or Cash&Carries. As the major part of the retail structure is still made by the small stores, it is critical that these importers/distributors supply these wholesalers.

In the future, the retailers will tend to work directly with the suppliers (producers/importers/exporters), avoiding distributors. Thus, distributors will focus on markets which could not be covered by big retailers (rural areas, small stores etc.). Some of them might orient towards developing specialized logistics services (re-packing, transport, storage) or towards retail.

Following this trend, we noticed some of the retail chains are exploring ways of becoming direct importers and are searching for partners able to operate on mixed-containers basis. This activity will be mostly applied to niche products or high-valued products targeting certain segments of population (such as expats).

Another type of strategy would be that the U.S. exporter would find a local exclusive representative. In this case, the representative would be totally dedicated to one company’s segment of products and be responsible for all promotional activities (advertising, sampling).

The specific requirements (especially delivery terms) and high fees charged by the retail chains are a barrier to many suppliers. Modern retailers only work with suppliers able to continuously deliver goods (no stocks-out) with consistent quality. As one company intends to display/sell its products through one retailer for the first time, a fee varying between $1,000 - $5,000 should be paid. Also for each of the outlets of the respective chain another $800-1,000 should be paid. Additional fees for products displays, new product introductions and obligatory promotional activities would be collected.

III. MARKET STRUCTURE

A. HYPERMARKETS, SUPERMARKETS, CASH&CARRIES AND DISCOUNT SHOPS

The modern retail format increased over time, currently holding about 21% at the national level. Most of these retailers sell domestic products. However, due to the significant consumer demand, the domestic supply for certain food product categories can no longer keep pace with the demand and this is covered by imports.